Tuesday, September 05, 2006

Calls of Note Part 8

- William Blair is cautious on Guitar Center (NASDAQ:GTRC) noting that although management has provided no update on business subsequent to the second quarter, firm's store channel checks and escalating competitive offers on the Internet suggest a less-than-robust end-market environment, likely as a result of a lackluster overall consumer climate. Given their concerns, the firm is lowering their fourth-quarter estimate by $0.16, to $1.15 (versus consensus of $1.29), bringing full year 2006 estimate to $2.64 (up 9% excluding options and LTIP).

Firm's third-quarter estimate remains $0.40, at the low end of guidance of $0.40 to $0.46 and below consensus of $0.43. Although they remain optimistic that their $0.40 estimate will be met, they cannot rule out the possibility of an earnings shortfall.

A recent conversation with management confirmed that the competitive environment on the Internet is again becoming more erratic, after exhibiting signs of stability for much of this calendar year.

Firm also suspects that the core Guitar Center business is facing a challenging environment, and they now project comps are more likely to come in near the low end of management's 3% to 5% guidance in the third quarter absent a ramp-up in promotional activity in September.

Maintains Outperform due to valuation, ongoing solid fundamentals and dominant share in an attractive niche market.